Op-Ed

05.02.125:15 PM ET

Joseph Stiglitz: The 99 Percent Wakes Up

Inequality isn’t only plaguing America—the Arab Spring flowered because international capitalism is broken. In From Cairo to Wall Street: Voices from the Global Spring, edited by Anya Schiffrin and Eamon Kircher-Allen,Nobel laureate Joseph Stiglitz says the world is finally rising up and demanding a democracy where people, not dollars, matter—the best government that money can buy just isn’t good enough.

There are times in history when people all over the world seem to rise up, to say that something is wrong and to ask for change. This was true of the tumultuous years of 1848 and 1968. It was certainly true in 2011. In many countries there was anger and unhappiness about joblessness, income distribution, and inequality and a feeling that the system is unfair and even broken.

Both 1848 and 1968 came to signify the start of a new era. The year 2011 may also. The modern era of globalization also played a role. It helped the ferment and spread of ideas across borders. The youth uprising that began in Tunisia, a little country on the coast of North Africa, spread to nearby Egypt, then to other countries of the Middle East, to Spain and Greece, to the United Kingdom and to Wall Street, and to cities around the world. In some cases, the spark of protest seemed, at least temporarily, quenched. In others, though, small protests precipitated societal upheavals, taking down Egypt’s Hosni Mubarak, Libya’s Muammar Qaddafi, and other governments and government officials.

Something Is Wrong

That the young people would rise up in the dictatorships of Tunisia and Egypt was understandable. They had no opportunities to call for change through democratic processes. But electoral politics had also failed in Western democracies. There was increasing disillusionment with the political process. Youth participation in the 2010 U.S. election was telling: an unacceptably low voter turnout of 20 percent that was commensurate with the unacceptably high unemployment rate. President Barack Obama had promised “change we can believe in,” but he had delivered economic policies that seemed like more of the same—designed and implemented by some of the same individuals who were the architects of the economic calamity. In countries like Tunisia and Egypt, the youth were tired of aging, sclerotic leaders who protected their own interests at the expense of the rest of society.

And yet, there were, in these youthful protesters of the Occupy Movement—joined by their parents, grandparents, and teachers—signs of hope. The protesters were not revolutionaries or anarchists. They were not trying to overthrow the system. They still had the belief that the electoral process might work, if only there was a strong enough voice from the street. The protesters took to the street in order to push the system to change, to remind governments that they are accountable to the people.

The name chosen by the young Spanish protesters—los indignados, the indignant or outraged—encapsulated the feelings across the world. They had much to be indignant about. In the United States, the slogan became “the 99 percent.” The protesters who took this slogan echoed the title of an article I wrote for the magazine Vanity Fair in early 2011 that was titled “Of the 1%, for the 1%, and by the 1%.” The article cited studies that described the enormous increase in inequality in the United States—to the point where 1 percent of the population controls some 40 percent of the wealth and garner for themselves some 20 percent of all the income. In other countries, the lack of opportunities and jobs and the feeling that ordinary people were excluded from the economic and political system caused the feeling of outrage. In his essay, Egyptian activist Jawad Nabulsi discusses how the system was fixed in favor of the upper classes, and he uses the word fairness repeatedly to describe what was lacking in Egypt under Mubarak.

Something else helped give force to the protests: a sense of unfairness. In Tunisia and Egypt and other parts of the Middle East, it wasn’t just that jobs were hard to come by, but those jobs that were available went to the politically connected. In the United States, things seemed more fair, but only superficially so. People who graduated from the best schools with the best grades had a better chance at the good jobs. But the system was stacked because wealthy parents sent their children to the best kindergartens, grade schools, and high schools, and those students had a far better chance of getting into the elite universities. In many of these top schools, the majority of the student body is from the top quartile, while the third and fourth quartiles are very poorly represented. To get good jobs, one needed experience; to get experience, one needed an internship; and to get a good internship, one needed both connections and the financial wherewithal to be able to get along without a source of income.

Around the world, the financial crisis unleashed a new sense of unfairness, or more accurately, a new realization that our economic system was unfair, a feeling that had been vaguely felt in the past but now could no longer be ignored. The system of rewards—who received high incomes and who received low—had always been questioned, and apologists for the inequality had provided arguments for why such inequality was inevitable, even perhaps desirable. The inequities had been growing slowly over time. It is sometimes said that watching changes in income inequality was like watching grass grow. Day by day, one couldn’t see any change. But as those who live near abandoned subprime houses know all too well, within a few months, scrub and weeds can quickly replace the best of manicured lawns. Over time, the change is unmistakable, and so too, over time, the inequality has increased to the point where it cannot be ignored. And that’s what’s been happening in the United States and many other countries around the world.

Even in the United States, a country not given to class warfare, there is today a broad consensus that the top should be taxed at a higher rate or at least not taxed at a lower rate. While some at the top may believe that they earned what they received through hard work, and it is their right to keep it, the reality (which many of the richest do realize) is that no one succeeds on his own. The poor often work far harder than the richest. In developing countries, the poor lack the chance of education and have no access to funds, and their economies are dysfunctional, but they work long hours carrying water, looking for fuel, and toiling at manual labor. Even in developed countries, life chances are affected by where one is born and the education and income of one’s parents. Often it comes down to luck, being in the right place at the right time.

It was not just the worsening inequality that outraged the protesters of 2011. It was a sense that at least some of those incomes were not honestly earned. Injustice motivated the Occupy Wall Streeters just as it motivated the young Tunisians of the Arab Spring. If someone earns huge incomes as a result of a brilliant contribution that leads to huge increases in incomes of the rest of society, it might seem fair that he receive a fraction, perhaps a substantial fraction, of what he has contributed. Indeed, the dominant paradigm in economics attempted to justify societal inequalities by saying (I should say, assuming) that they were related to differences in “marginal” productivities: those who, at the margin, contributed more to society got more.

Now, in the aftermath of the crisis, it seemed grossly unfair that the bankers walked off with outsized bonuses while those who suffered from the crisis brought on by those bankers’ reckless and predatory lending went without a job. It seemed grossly unfair that government bailed out the banks but seemed reluctant to even extend unemployment insurance for those who through no fault of their own could not get employment or to provide anything but token help to the millions who were losing their homes. What happened undermined the prevailing justification for inequality, that those who made greater contributions to society receive (and should receive) larger rewards. Bankers reaped large rewards even though their contribution to society—and even to their firms—had been negative. In other sectors, CEOs who ran their firms into the ground, causing losses for shareholders and workers alike, were rewarded with gargantuan bonuses.

If no one is accountable, the problem must lie in the economic system. This is the inevitable conclusion and the reason that the protesters are right to be indignant. Every barrel has its rotten apples, but the problem, as MIT Professor Susan Silbey has written, comes when the whole barrel is rotten.

Much of what has gone on can only be described by the words moral deprivation. Something wrong had happened to the moral compass of so many of the people working in the financial sector. When the norms of a society change in a way that so many have lost their moral compass—and the few whistle-blowers go unheeded—that says something significant about the society. The problem is not just the individuals who have lost their moral compass but society itself.

What the protests tell us is that there was outrage and that outrage gives hope. Americans have always had an idealistic streak, reflected both in the instruction in schools and in political rhetoric. Kids read the Declaration of Independence, “all men are created equal,” and they read the words literally, all men, white and black, and they believe them. They recite the Pledge of Allegiance, which promises “justice for all,” and they believe it.

Market Failures

The list of grievances against corporations was long, and longstanding. For instance, cigarette companies stealthily made their dangerous products more addictive, and even as they tried to persuade Americans that there was no scientific evidence of the dangers of their products, their files were filled with evidence to the contrary. Exxon had similarly used its money to try to persuade Americans that the evidence on global warming was weak, even though the National Academy of Sciences had joined with every other scientific body in saying that the evidence was strong. Chemical companies had poisoned the water, and when their plants blew up, they refused to take responsibility for the death and destruction that followed. Drug companies used their monopoly power to charge prices that were a multiple of their costs of production, condemning to death those who could not afford to pay.

The financial crisis itself had brought out more abuses. While the poor suffered from predatory lending practices, almost every American suffered from deceptive credit card practices. And while the economy was still reeling from the misdeeds of the financial sector, the BP oil spill showed another aspect of the recklessness: lack of care in drilling had endangered the environment and threatened jobs of thousands of people depending on fishing and tourism.

But even before the crisis, the evidence was that the market economy was not deliveringfor most Americans. GDP was going up but most citizens were worse off. Not even the laws of economics long championed by the political right seemed to hold. Earlier, we explained how the theory that is supposed to relate rewards to social contributions had been falsified by the Great Recession. The theory holds that competition is supposed to be so strong in a perfectly efficient market that “excess” profits (returns in excess of the normal return on capital) approach zero. Yet each year we saw the banks walking off with mega-profits so large that it is inconceivable that markets are really competitive. Standard courses in economics talk about the law of demand and supply, where prices are determined to equate the two. In the theoretical model, there is no such thing as unemployment, no such thing as credit rationing. But in fact, we have a world in which there are both huge unmet needs (e.g., investments to bring the poor out of poverty, to bring development to Africa and the other less developed countries in other continents around the world, to retrofit the global economy to face the challenges of global warming) and vast underutilized resources (e.g., workers and machines that are idle or not producing up to their potential). As of December 2011, some 25 million Americans who would like a full time job can’t get one, and the numbers in Europe are similar.

Innovation and globalization provide the most recent—and the most important—contexts to observe the failings of the market. Both were supposed to make our economy more prosperous, and yet both seem to have resulted in an economy in which most citizens are becoming worse off.

In recent research, Bruce Greenwald and I have traced the roots of the Great Depression to an increase in agricultural productivity so rapid that fewer and fewer people were needed to grow the world’s food. In the United States in 1900, a large portion of the labor force worked on farms; today less than 2 percent of the population grows more food than even an obese population can consume—and there are large amounts left over for exports. Over time, most people working in agriculture who were no longer needed looked for alternative employment. But at times, the movement away from agriculture was far from smooth. Between 1929 and 1932, agricultural prices plummeted, and incomes fell by an amount variously estimated at one-third or two-thirds. Such precipitous declines in income resulted in corresponding declines in demand for manufactured goods. Rural real estate prices plummeted and credit became unavailable, and so, despite their already low income, farmers were trapped in the declining sector. Just when migration out of the rural sector should have been increased, it came to a halt. If people had been able to relocate, if new jobs had been created, the increases in productivity would have been welfare-increasing, but as it was, given the market failures, those in both the city and the rural sector suffered.

It seems strange, in the midst of the Great Recession, when one out of six Americans who would like to get a full-time job is unable to get one, to see stores replacing low-wage cashier clerks with machines. The innovation may be impressive, profits may even be increased, but the broader economic and social consequences cannot be ignored: higher unemployment, lower wages for unskilled labor as the balance of demand and supply tilts more against workers, and greater inequality.

Political Failures

The political system seems to be failing as much as the economic system, and in some ways, the two failures are intertwined. The system failed to prevent the crisis, it failed to remedy the crisis, it failed to check the growing inequality, it failed to protect those at the bottom, and it failed to prevent the corporate abuses. And while it was failing, the growing deficits suggested that these failures were likely to continue into the future.

Americans, Europeans, and people in other democracies around the world take great pride in their democratic institutions. But the protesters have called into question whether there is a real democracy. Real democracy is more than the right to vote once every two or four years. The choices have to be meaningful. The politicians have to listen to the voices of the citizens. However, increasingly, and especially in the United States, it seems that the political system is more akin to “one dollar one vote” than to “one person one vote.” Rather the correcting the market’s failures, the political system is reinforcing them.

Tax systems in which a billionaire like Warren Buffettpays less taxes (as a percentage of his income) than those who work for him, or in which speculators who helped bring down the global economy are taxed at lower rates than are those who work for their income reinforce the view that politics is unfair, and contribute to the growing inequality.

The failures in politics and economics are related—and they reinforce each other. A political system that amplifies the voice of the wealthy also provides opportunity for laws and regulations—and the administration of laws and regulations—to be designed in ways that not only fail to protect the ordinary citizens against the wealthy but enrich the wealthy at the expense of the rest of society.

Globalization and Markets

My criticism of globalization lies not with globalization itself, but with the way it has been managed: it is a two-edged sword, and if it is not managed well, the consequences can be disastrous. When managed well—and a few countries have succeeded in managing it well, at least so far—it can bring enormous benefits.

The same is true for the market economy: the power of markets, for good and for evil, is enormous. The increase in productivity and standards of living in the past two hundred years have far exceeded those of the previous two millennia, and markets have played a central role—though so too has government, a fact that free marketers typically fail to acknowledge. But markets have to be tamed and tempered, and that has to be done repeatedly to make sure that they work to the benefit of most citizens. That market control happened in the United States in the progressive era, when competition laws were passed for the first time. It happened during the New Deal, when social security, employment, and minimum wage laws were passed. The message of the Occupy Wall Streeters, and other protesters around the world, was that markets once again needed to be tamed and tempered. Even in parts of the Middle East, where they brought increases in growth, the benefits did not trickle down.

From Cairo to Wall Street

In more than forty years of travel to developing countries, I have seen these problems at close hand. And throughout 2011, I gladly accepted invitations to Egypt, Spain, and Tunisia, and I met with protesters in Madrid’s Retiro Park, at Zuccotti Park in New York, and in Cairo where I spoke with the young men and women who had played a central role at Tahrir Square. As we talked, it was clear to me that they understood how in many ways the system has failed. The protesters have been criticized for not having an agenda, but such criticism misses the point of protest movements. They are an expression of frustration with the electoral process. They are an alarm.

At one level, these protesters are asking for so little: for a chance to use their skills, for the right to decent work at decent pay, for a fairer economy and society. Their requests are not revolutionary but evolutionary. But at another level, they are asking for a great deal: for a democracy where people, not dollars, matter; and for a market economy that delivers on what it is supposed to do. The two demands are related: unfettered markets do not work well, as we have seen. For markets to work the way markets are supposed to work, there has to be appropriate government regulation. But for that to occur, we have to have a democracy that reflects the general interests, not the special interests. We may have the best government that money can buy, but that won’t be good enough.

In some ways, the protesters have already accomplished a great deal: think tanks, government agencies, and the media have confirmed their allegations, of the high and unjustifiable level of inequality, the failures of the market system. The expression “we are the 99 percent” has entered into popular consciousness. No one can be sure where the Arab Spring or the Occupy Wall Street movements will lead. But of this we can be sure: these young protesters have already altered public discourse and the consciousness of both ordinary citizens and politicians.